European Private Equity Deal Value Falls 23% Year Over Year

Through the end of September, this year has seen a 23% decline in the total value of European private equity transactions relative to 2015. Even if that number is revised upward somewhat as more data is collected in the future, it’s clear that amid the global slowdown in the buyout cycle, Europe remains no exception.

Private equity managers exhibiting caution

Introduction

Though it is subject to a more diverse set of underlying deal drivers, the European private equity marketplace has largely resembled its US counterpart in recent months. Against a backdrop of record-low interest rates and widespread political unrest, European private equity deal flow has decreased substantially through the first three quarters of the year.

Fundraising, however, remains a bright spot in the region, as limited partners continue to demand exposure to the more developed economies on the continent. Meanwhile, Brexit could change the rules of the game for all players involved, but we foresee opportunities for PE no matter how that situation develops.

We hope this report is useful in your practice. As always, feel free to send any questions or comments to [email protected]

[drizzle]

Dylan E. Cox

Analyst

Deal Flow Continues To Fall

Overview

European private equity activity continued its slide in the third quarter. Eur 249 billion has been deployed across 1,989 transactions through the first three quarters of 2016, representing 23% and 11% respective decreases over the same period last year. Compared to the US, Europe has experienced a sharper decrease in terms of deal value this year, but more resilience in terms of the number of deals being completed. As economic growth continues to lag and political unions are strained, European dealmakers continue to grapple with a multitude of factors that differ from country to country.

European Private Equity

While Europe certainly isn’t immune to the broader PE downturn this year, foreign investment will continue to support the market as LPs continue to diversify across the globe. 20% of PE deals in Europe this year have had involvement from a US firm, a figure that has inched up from 16% in 2010. Yet, despite the prevalence in foreign investment, Europe has been marked by a lack of PE megadeals. Only two deals over Eur 2.5 billion have been completed through the first three quarters, compared to 19 during calendar year 2015.

IT has made up 16% of European private equity activity thus far in 2016, higher than any other year in our dataset. 312 PE-backed deals in IT have been completed this year, totaling Eur 28 billion. Similar to IT in the US, deal flow in the European IT sector has shown resilience and even improvement while the rest of the market slows.

US-based Investor Activity

IT sector stands out

Deals by sector & size

Spotlight: UK & Ireland

Overview of PE activity in the UK & Ireland

Through 3Q 2016, PE in the UK and Ireland has experienced a 34% decrease in deal value and a 14% fall in the number of completed transactions—a more pronounced downturn than what we saw in the rest of Europe during that time. This deal value figure, however, should be taken with a grain of salt. Due to the pound’s recent devaluation against the euro, 3Q deals completed in pounds will appear artificially low when expressed in euros. Therefore, the number of transactions is a more accurate measure of deal activity here.

Regardless, the obvious talking point here is Brexit. And while Brexit is generally viewed as being awful for the British economy, the economic fallout from the vote has not been as bad as many had expected, at least to date. Ireland, of course, will still retain its current status as part of the European Union, while Scotland could hold another referendum regarding first their status as part of Great Britain and then as an EU member.

At the very least, as Britain moves through its separation process, as well as the recent legal challenges to it, mispricings in the market will be inevitable. We believe that PE firms, with longer investment timeframes than most, are well positioned to navigate this changing landscape and deploy capital with timely effectiveness.

Exit market remains strong

Exits

Eur 147 billion in PE-backed exits closed across 794 transactions through the first three quarters of 2016, putting the value of exits on track with last year, yet the number of transactions has declined by about 13%.

Secondary buyouts have made up 45% of PE exits thus far in 2016, higher than any other year since 2007. The growing proportion of SBOs is similar to what we’ve seen in the US markets, and can be partially attributed to the weak IPO markets this year. In an industry where a group of managers is always in need of liquidity, moving forward down the SBO route today has its benefits.

That being said, corporate acquisitions still make up an outsized portion of exit value. The nine largest PE exits during 2016 have all been via corporate acquisition.